Energy and Climate ChangeMemorandum submitted by Aldersgate Group

The Energy and Climate Change (ECC) Committee is launching an inquiry to investigate the case for consumption-based greenhouse gas (GHG) emissions reporting in the UK. The Committee has invited responses addressing some or all of the following questions:

How do assessments of the UK’s GHG emissions differ when measured on a consumption, rather than a production basis?

Is it possible to develop a robust methodology for measuring emissions on a consumption rather than production basis and what are the challenges that need to be overcome to deliver this?

What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to GHG emissions accounting?

Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy?

Would it be (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis?

What are the potential implications at the international level of the UK adopting a consumption- rather than production-based approach to GHG emissions accounting?

Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of?

Aldersgate Group (AG)

The AG is an alliance of leaders from business, politics and society that drives action for a sustainable economy. The views expressed in this document can only be attributed to the AG and not individual members. The AG held a roundtable in October 2011 with business representatives to help inform our response to this inquiry.

Summary

Assessment and Methodologies

A number of studies demonstrate that the UK’s consumption emissions are significantly higher than its production emissions and this gap is likely to grow considerably.

Potentially, the UK could import as much carbon as it produces by 2025.

The lack of confidence in the data gathered for consumption-based emissions reporting (CBER) from some external sources is a major cause for concern.

Benefits and Disadvantages

The AG believes that more transparency for the UK’s full carbon footprint is required for a system of domestic carbon budgets effectively to address an international challenge such as climate change.

The UK should be a pioneer in CBER—in line with the UK’s aspiration to be an international leader in addressing climate change.

The AG believes it is too early to mandate scope 3 reporting at either a national or business level. However, it should be strongly encouraged to help drive good decision making with better and more sustainable outcomes.

A roadmap for scope 3 emissions reporting should be as follows:

1.Start measuring it, engage suppliers and identify “hot spots”.

2.Use it to make better procurement decisions.

3.Use it to improve performance and/or implement better policy.

4.Ultimately report metrics, targets, actions and achievements.

International Implications

A consumption-based approach would put greater responsibility on an increasingly service-based economy such as the UK to help developing countries reduce their GHG emissions. It would also emphasise the importance of securing a just international climate change treaty.

A further implication is that international targets for carbon emission reductions would have to be renegotiated.

Carbon Leakage

To date, there is no evidence of industry relocating from the UK solely as a result of climate change policy.

While, in a limited number of industries, carbon costs can be significant and must be addressed by policy makers, often they are exaggerated and the potential economic benefits ignored.

When most businesses decide on a production location, environmental costs tend to be low relative to considerations of the cost of capital, fiscal regime, wage costs, workforce skills, exchange rate fluctuations, infrastructure and proximity to the market.

The Committee on Climate Change should investigate issues and methodologies relating to CBER in their upcoming inquiry into carbon leakage.

Business Implications

Similarly to national reporting, the AG believes that there should be greater focus on lifecycle reporting at the corporate level.

Full lifecycle analysis in targeted sectors will allow policy makers and consumers to focus on a “magic metric”—a metric associated with the biggest impact across the full value chain. This single piece of data would help to galvanise legislation to create a level playing field that promotes strong competition and innovation to redesign products to reduce their environmental footprint.

This would lead to more informed decisions, help to eliminate greenwash and should be used to shape legislation.

For example, carbon transparency in the automotive sector is measured on a product basis (which focuses on tailpipe emissions, where there is the greatest carbon impact) rather than at the company level (operations and manufacturing).

CBER should not be undertaken solely as an accounting exercise but seek to drive transformative change.

AG Response

How do assessments of the UK’s GHG emissions differ when measured on a consumption rather than a production basis?

1. The UK formally reports its GHG emission and carbon budgets on a production basis, as consistent with the Intergovernmental Panel on Climate Change (IPCC). It does not take into account the emissions that are generated through the consumption of goods and services that have been imported from overseas. On the other hand, it does take into account the emissions from goods and services that are produced domestically but exported elsewhere.

2. A number of studies demonstrate that the UK’s consumption emissions are significantly higher than its production emissions. If carbon emissions are calculated on the basis of consumption rather than production (allowing and adjusted for carbon intensive imports and international travel), the UK’s performance on carbon emissions between 1990 and 2005 is transformed from a 19% reduction to a 15% increase.1 Research by the Carnegie Institute of Washington in California finds that UK demand for imported goods is responsible for more GHG emissions abroad than any other European country, and is third worldwide, behind only the US and Japan.2

3. What is more, it is highly likely that a growing proportion of the UK’s carbon footprint will be imported from oversees as production emissions fall due to domestic climate change policies. Research by the Carbon Trust demonstrates that in 1992, the UK imported an additional net 7% emissions embodied in trade; by 2004, this had grown to 34%. Net UK imports of emissions are projected to continue to grow to 73—96% of production emissions by 2025, the range depending on the carbon intensity of production in other countries, and the anticipated reduction in the UK’s production emissions from 2004 to 2025. This will result in the UK potentially importing as much carbon as it produces at home by around 2025, making imported carbon a significant issue.3

Is it possible to develop a robust methodology for measuring emissions on a consumption rather than production basis and what are the challenges that need to be overcome to deliver this?

4. The lack of confidence in the data gathered for CBER from some external sources is a major cause for caution. GHG emissions generated within the UK are measured by recognised methods, but imported emissions are derived using less robust methods; for example the Global Trade Analysis Project (GTAP) Database data is provided by academics and trade associations on a voluntary basis and is based on a number of approximations.

5. Defra has commissioned research, updated in May 2011, that provides analysis of where GHG emissions associated with UK consumption occur by both sector and country. This traces the embedded GHG emissions of 57 product groups for 2004 across 113 countries and 57 sectors.4 While this is helpful to inform cost effective climate change mitigation actions and policy development, the data is not sufficiently robust to measure accurately and set targets at this stage.

6. The data analysed for the Defra report is high level: UK exports are excluded, imports and supply chain data taken into account but only by raw products (such as iron, steel, rice, etc). Consumer products (such as a washing machine or hairdryer) are not broken down into their individual components, as this would require lifecycle analysis for each and every product. This level of complexity would be a major barrier to the adoption of full CBER.

7. The Defra report also notes, that “there are a number of uncertainties associated to the GTAP database and to the construction of MRIO models in general. These are related to a number of issues, like manipulation due to calibration, balancing and harmonisation, use of different time periods, currencies, country classifications and levels of disaggregation, inflation, data errors, among others.”5

Is there any evidence of industry relocating from the UK to other countries as a result of UK climate change policy?

8. To date, there is no evidence of industry relocating from the UK solely as a result of climate policy. The Government is committed to ensuring that energy intensive industries remain competitive and ensuring that it sends a clear message that the UK is open for business. Before the end of the year, it will announce a package of measures for the energy intensive businesses whose international competitiveness is most affected by our energy and climate change policies. This is in response to a number of competitive concerns that have been raised from energy intensive industries, such as the potential risk of carbon leakage.

9. While, in a limited number of industries, these costs can be significant and must be addressed, often they are exaggerated and the potential economic benefits ignored. For example, analysis by the Carbon Trust is the “nail in the coffin for the myth that the EU ETS presents a threat to overall business competitiveness”, as it finds that carbon costs remain trivial compared to other influences on international competitiveness for more than 90% of UK manufacturing activities.6 When businesses decide on a production location, environmental costs tend to be low relative to considerations of the cost of capital, fiscal regime, wage costs, workforce skills, exchange rate fluctuations, infrastructure and proximity to the market. Another Carbon Trust study finds that low carbon manufacturing would be severely weakened if all sectors currently deemed at risk of carbon leakage by the European Commission received free allocation of permits.7

10. Climate legislation should be globally consistent to counter the risk of carbon leakage, or a “carbon shift”. It is evident that the point of production of iron and steel has shifted considerably to developing countries but this has been mainly due to a response to demand shift and cheaper labour.

11. For example, China produces 626 million tonnes of steel per year, compared to the UK’s 9.7 million,8 so production-based targets in the UK or EU ETS can have little impact on the global emissions of the steel sector. While there are a number of challenges to country averages for CBER (such as the disparity of the carbon footprint of steel manufactured from an electric arc furnace or integrated by refining iron ore), more transparency would help to highlight some interesting issues such as the carbon benefits of local recycling.

12. It is welcome that the Committee on Climate Change is launching an inquiry into carbon leakage and competitiveness that is due to report by March 2012. As part of this inquiry, the Committee should investigate issues relating to CBER and examine appropriate methodologies that the UK should adopt.

What are the benefits and disadvantages associated with taking a consumption-based rather than production-based approach to GHG emissions accounting? Would it be (a) desirable and (b) practicable for the UK to adopt emissions reduction targets on a consumption rather than production basis?

13. The AG believes that more transparency about the UK’s full carbon footprint is required for a system of domestic carbon budgets to address an international challenge such as climate change effectively. As such, much greater focus needs to be placed on interventions that prompt awareness and action along the supply chain.

14. While moving towards CBER is a laudable goal, it should complement rather than replace production based reporting (even were the data to become more robust). Defra’s work in this area provides valuable analysis of carbon emissions from an alternative perspective but should not be used as stand-alone data. AG members are generally of the view that CBER data will be sufficiently robust in 10–15 years time and the UK would be well placed to be a pioneer—in line with the UK’s aspiration to be an international leader in addressing climate change.

15. The AG believes it is too early to mandate scope 3 reporting at either a national or business level. However, it should be strongly encouraged to help drive good decision making with better and more sustainable outcomes.

A roadmap for scope 3 emissions reporting should be as follows:

1.Start measuring it, engage suppliers and identify “hot spots”.

2.Use it to make better procurement decisions.

3.Use it to improve performance and/or implement better policy.

4.Ultimately report metrics, targets, actions and achievements.

What are the potential implications at the international level of the UK adopting a consumption rather than production-based approach to GHG emissions accounting?

16. A consumption-based approach would put greater responsibility on an increasingly service-based economy such as the UK to help developing countries reduce their GHG emissions. It also emphasises the importance of securing a just international climate change treaty. A further implication is that international targets for carbon emission reductions would have to be renegotiated.

Are there any other issues relating to consumption-based emissions reporting that you think the Committee should be aware of?

17. While this inquiry is focused on national reporting, the adoption of CBER would have significant implications for businesses. Much like national reporting, companies can report approximations using economic input/output models, or more accurately using lifecycle assessments (which is much more resource intensive to undertake).

18. The Defra carbon reporting guidance for large organisations defines scope 3 emissions as those “that are a consequence of your actions, which occur at sources which you do not own or control and which are not classed as scope 2 emissions. Examples of scope 3 emissions are business travel by means not owned or controlled by your organisation, waste disposal, or purchased materials or fuels.”9

19. While the guidance states that reporting scopes 1 and 2 emissions is “recommended”, it suggests that reporting scope 3 emissions is “discretionary”. It states that “for some organisations, emissions within scope 3 may be the largest proportion of total emissions. By calculating your scope 3 emissions, you will get a more complete understanding of your organisation’s total impact on climate change. Identifying your organisation’s scope 3 emissions will also help increase your awareness of where your organisation sits within the supply chain and enable you to engage with other organisations in the supply chain. However it is acknowledged that it can be difficult to measure and calculate your scope 3 emissions so it is recommended you focus on your “significant” scope 3 emissions.”

20. Just as with national reporting, the AG believes that there should be greater focus on lifecycle reporting at the corporate level. For certain businesses, such as those with narrower procurement ranges and operational control of key points in the value chain, this could improve transparency and focus attention towards the greatest impacts rather than solely direct emissions (scopes 1 and 2).

21. A typical product contains a large number of components and materials that are sourced from different locations. There are environmental impacts at each stage of the supply chain, including manufacture, use and disposal. Lifecycle assessment (LCA) to a defined international standard (such as ISO14040 and ISO14044) helps to assess environmental impacts associated with all the stages of a product's life and helps to avoid a narrow outlook.

22. According to the European Commission, “the key aim of Life Cycle Thinking is to avoid ‘burden shifting’. This means minimising impacts at one stage of the lifecycle, or in a geographic region, or in a particular impact category, while helping to avoid increases elsewhere. For example, saving energy during the use phase of a product, while not increasing the amount of material needed to provide it.”10

23. There are some immediate business benefits associated with LCA. For example, according to the Government’s Business Link website:

“If you are serious about reducing the environmental impact of your business, it's essential that you work in close partnership with your suppliers to ensure that they maintain their own high environmental standards. As a supplier, you should also help your customers to meet their environmental targets.11

There can be significant cost benefits from being environmentally aware. Reducing energy consumption, raw materials, waste production and waste disposal can all have a major impact on the profit your business makes. By working together with other organisations in your supply chain you can help to ensure that you each operate efficiently and keep your impact on the environment to a minimum.”12

24. More fundamentally, a shift to full transparency of sustainability performance on a product basis in targeted sectors will allow policy makers and consumers to differentiate products and services in terms of the highest impacts, allowing for more informed decisions and helping to shape behaviour. In many sectors, there should be a focus on a “magic metric”—a metric associated with the biggest impact across the full value chain. This single piece of data would help to galvanise legislation to create a level playing field that promotes strong competition and innovation to redesign products to reduce their environmental footprint. This would help to drive cost-effective emissions reductions and help to eliminate greenwash by reducing the ability of companies to cherry pick the most flattering data. Good quality reporting at a product level also allows legislation to be introduced, which could drive the process more effectively than customer engagement.

25. For example, one of the most significant areas of progress in terms of UK carbon abatement is energy efficiency of cars. New car emissions were 144 gCO2/km in 2010, compared to an indicator of 156 gCO2/km and a 2020 indicator (and EU target) of 95 gCO2/km13. In this sector, carbon transparency is measured on a product basis (which focuses on tailpipe emissions,- the “magic metric”) rather than at the company level (operations and manufacturing). This allows for market frameworks and regulation to be more effective (such as the EU regulation, company tax bands and congestion charging) and ensures greater transparency for consumers who can differentiate between different cars on carbon performance and associated running costs.

26. The following lessons can be learned from this example:14

Develop a common metric based on the full life cycle impact of a product—or at least on its biggest impact.

Adopt a top-down visionary approach at European level for the performance required in a few years time (or federal level if in the US).

Regulate to ensure the metric is displayed on all promotional materials.

Make sure the metric is visible to consumers at point of sale.

Use national taxes and regulations to reinforce changes brought about by the metric.

Enable local and city legislation and taxes to reward products with the lowest footprint.

Encourage companies and public purchasers to make decisions that promote products with smaller footprints.

27. Full product transparency will not be suitable for all products and sectors due to complexity and costs (for example, it would not be feasible for a supermarket to undertake LCAs for all their products). However, more progress should be made in targeted sectors such as energy generation (with labels demonstrating carbon content), transport (including emissions per passenger per km in aviation industry), commercial buildings (Display Energy Certificates) and the services sector (such as banks and law firms).

28. While product footprints are vital in helping a business understand the environmental impacts of its supply chain, it can be complex to make comparisons between competitors across a whole product. While there can be issues surrounding accuracy and a high margin of error regarding assumptions, reporting of scope 3 emissions should be strongly encouraged. Product category rules, such as those drawn up by Defra, can be used to help make informed assumptions, while an industry body can ensure continuity in how those assumptions are made. Fundamentally, a business’s goal should be to establish a benchmark and assess performance against it, rather than trying to calculate the minutiae.

29. While CBER is important to demonstrate quantitatively climate change impacts, it should not be undertaken solely as an accounting excise that does not help to drive change. CBER should primarily aim to reduce overall GHG emissions radically by re-designing products and systems or helping drive customer demand for lower emission goods and services. The key leverage is that many products are designed in the West and manufactured by developing countries. Decisions at product design level by a UK product manager could dramatically cut imported GHG emissions (and more importantly, the rest of the world). That design would immediately become a key service that the UK could develop expertise, export and drive competitive advantage by investing in technological breakthroughs.

October 2011

1 Dieter Helm, Jonathon Phillips and Robin Smale (2007) Too good to be true? The UK’s climate change record.

2 Carnegie Institute of Washington (March 2010). Reported in the Guardian: UK import emissions are the highest in Europe, figures show (8th March 2010).

3 http://www.carbontrust.co.uk/policy-legislation/international-carbon-flows/global-flows/pages/uk.aspx#7

4 Sustainability Research Institute, University of Leeds (May 2011) UK Consumption Emissions by Sector and Origin.

5 Ibid.

6 Carbon Trust (January 2008) Press Release: EU ETS to have marginal impact on competitiveness of EU industry.

7 Carbon Trust (March 2010) Tackling carbon leakage: Sector-specific solutions for a world of unequal carbon prices.

8 EEF (2011) Key Statistics, p14.
http://www.eef.org.uk/eef1/handlers/resource.ashx?http://www.eef.org.uk/NR/rdonlyres/C2F00A49-B277-4015-9EEB-74E3051721D0/19061/KeyStatistics2012.pdf

9 Defra (September 2009) Guidance on how to measure and report your GHG emissions.

10 http://lct.jrc.ec.europa.eu/

11 ??????????

12 http://www.businesslink.gov.uk/bdotg/action/layer?r.i=1079442450&r.l1=1079068363&r.l2=1086021866&r.l3=1079438684&r.t=RESOURCES&topicId=1082899564

13 Committee on Climate Change (June 2011) Progress Report.

14 InterfaceFlor (November 2011) Transparency in Action: The power of the magic metric.

Prepared 16th April 2012